* * * * * * * * * * * * REMINDER * * * * * * * * * * * * *
On the days that I don't publish, like today, you will
receive Bill Bonner's DAILY RECKONING. This will help you
to keep pace with the changes in the markets. Bonner and
I agree on most things in the field of economics, so the
two letters will reinforce each other.
* * * * * * * * * * * * * * * * * * * * * * * * * * * * *
Who's Paying for the Free Lunch?
The Daily Reckoning
Ouzilly, France
Monday, November 1, 2004
---------------------
*** Bundle-up, it's going to be a cold winter for
Americans...
*** An abundance of dollars and shortage of oil... the beat
goes on... the brain or the heart?...
*** Looking at the pieces that make up the whole...
drinking days are here again... and more!
---------------------
The consumer continues to dig his own grave.
The economy grew at a 3.7% rate in the 3rd quarter. The
number was a disappointment. Economists had hoped for
more.
Most of the increase came from "accelerated consumer
spending," which grew at a 4.6% rate. Consumer spending is
about 70% of the total GDP.
What to make of it?
The typical economist looks at the number and says, "All is
well. Consumers are spending. Greenspan is at the head of
the Fed. And God is somewhere in Heaven."
But while consumers spending rose, their income remained
about even with inflation. Where does the extra money come
from?
Oh yes, their houses are going up in price.
Among the many mysteries of modern life, one is how houses
can go up faster than the incomes of the people who live in
them. In fact, the money they have available for housing is
actually going down.
Among other things, energy costs are rising. The average
household paid about $6,000 for energy in 2000. This year,
it is expected to cost them between $8,000-$9,000.
Part of the reason for this increase is that they are using
more energy. In the last few years - largely due to the
Fed's extra-EZ credit - consumers have bought new, bigger
cars... and new, bigger houses. In 1970, the average house
measured 1500 square feet. Today, it is 2,230.
And today's house has many more electric devices.
Computers. Alarm systems. Microwaves. Televisions.
Meanwhile the price of energy itself is on the rise.
"I wouldn't be surprised to see $100 or $200 for a barrel
of oil in the next five to ten years," says Marc Faber.
"It's not a projection. It's that I wouldn't be surprised."
Faber lives in Asia. He looks out his window and sees a
huge uptake in the use of fossil fuels. He says, "We [in
China] have a per capita consumption of oil of 1.7 barrels.
In America it's 28 barrels, in South Korea 17 barrels,
Japan 17 barrels, in India 0.7 barrels. In Vietnam it's
probably also less than one barrel. So, in Asia with the
population of 3.6 billion people, we consume less oil than
the United States, with a population of 295 million.
"I would imagine that in Asia the demand will certainly
double by comparison. Say Mexico has a per capita
consumption of 7 barrels, Latin America 4.4 barrels. In
Asia, as I said, it's anywhere around 1.5 barrels."
Asia is where the majority of the world's people live. It
is also the region that has benefited most from Alan
Greenspan's very stimulating credit policies. Making things
for people who can't really pay for them is not a long-term
success strategy. But in the short-run, it has caused a
huge boom in Asian industry and put trillions of dollars in
Asian hands. As long as oil is priced in dollars, Asians
can buy a lot of it.
Like gold, oil took billions of years for the earth to
make. Nor is it an easy matter to get the earth's oil into
barrels. And unlike gold, the oil that comes to the surface
is used up quickly. When it is gone, it is gone for good.
Dollars, on the other hand, are neither mined nor pumped.
They are printed. Sometimes, they are merely noted -
electronically. Add a zero, at virtually no cost, and you
have increased the number of dollars ten times. As time
goes by, the consumer will need more oil and want more
gold. What he will probably have - and have in abundance -
is more dollars.
As Ray Dalio puts it: "An abundance of dollars and a
shortage of oil is a dangerous combination."
Here's more news from our currency counselor:
--------------
Chuck Butler, reporting from the Everbank trading desk in
St. Louis...
"Friday, we saw GDP disappoint, U of Michigan confidence
improve, and the Chicago PM soar! It was six of one and a
half-dozen of another, with regard to positive signs for
the economy. So, the dollar gave back more of the gains
made earlier in the week. In fact, I stayed at my desk on
Friday until I saw the 1.28 figure in dollar/ euro!"
Read "The Daily Pfennig" for more...
http://www.dailyreckoning.com/body_headline.cfm?id=4223
--------------
Bill Bonner, back in France:
*** Today is a holiday in France - Toussaint, or All Saints
Day. It also marks the 50th anniversary of the beginning of
France's war against terror in Algeria. On this day in
1954, terrorist groups attacked 70 targets throughout
Algeria. (More on this tomorrow... )
But here at the Daily Reckoning the beat goes on. Our beat
is the markets. But what moves the markets? Is it not the
people who buy and sell? What moves them to do so? Is it
the brain or the heart? One day they are willing to pay $20
for one dollar's worth of earnings. Six months later, they
think $10 is a little pricey - for the very same company.
An ounce of gold may be worth $800 one year. Twenty years
later, people pay no more than $400. Has the gold been
turned to base metal? Is the world a different place? Has
the dollar, in which gold is measured, really worth twice
as much?
People move markets. Here at the Daily Reckoning we wonder
what moves people. We especially wonder what moves groups
of people. Because the markets are not lonely, individual
pursuits, and investors are not like Michelangelo lying on
his back painting a ceiling. Instead, they are more like
infantrymen marching along as part of a great army... or
voters on their way to the polls after soaking up weeks of
party propaganda... or members of a lynch mob after soaking
up hours of whiskey.
A man on his own is a tolerable fellow. He usually does his
work passably well, knows right from wrong, says hello to
his neighbors, and has his moments of triumph and courage.
Yet, the same man - jacked up by politics or CNBC - will
put his hand on the Bible and swear to the most
preposterous things.
*** We have never met Rod Martin; we presume he is an
honest and decent man. Yet in his ode to Ronald Reagan and
George W. Bush, that takes the form of a book called Thank
You, President Bush, the man seems to have taken leave of
his senses all together. Freedom, he says, making no
attempt to explain what he means by the word, is the key to
peace and prosperity. This insight, he maintains, is what
made both Reagan and Bush such great presidents; they "got
it."
And yet, the insight is absurd. America's most costly war -
the war between the states - was fought between two groups
of people, both of whom were far freer than Americans
today. Freedom didn't stop them from killing each other.
At the Daily Reckoning headquarters, it's not that we don't
care about freedom. We just don't like anyone telling us
what to do... and we're partial to not being killed. [Ed.
Note: No matter who is elected president tomorrow, we know
one thing for sure: The days of the Great Dollar Standard
are dwindling fast. Neither candidate can help you protect
your house, your family... your wealth. But we have a few
suggestions. Be sure to get your free copy of:
Election Year Emergency Survival Kit
http://www.agora-inc.com/reports/DRI/electA04
*** The trouble with trying to work in rural France is that
there are too many interruptions. Yesterday, a neighbor
came to the door, with two bottles of "pineau" - a local
aperitif - that he had made himself. It is amazing anything
gets done in autumn. The grapes have been pressed. The
wines, and various derivative drinks, have been bottled.
Now it is time to uncork them.
Serge is a farmer... and a good, hearty chap. He was
dressed in a pair of corduroy pants, a wool cap, and a
hunting jacket, with torn pockets. He was also dripping
wet; it was raining outside, but the local men hardly
notice; they go about their business rain or shine.
Like so many men who work the soil, conversation does not
come easily to Serge. He always seems to be on the verge of
saying something. But the words never quite get out.
He begins to purse his lips as though to form a word. Then,
we have to guess what it is he wants to say.
"The hypotenuse of a triangle is equal to... " we were
about to suggest... when, suddenly and unexpectedly...
"Let's have a drink," he said.
One led to two... even though the conversation barely
budged an inch... and by the time he left we were
incapacitated.
The next day, another neighbor came over. He too, had
brought drinkables...
"Here is some wine I made," said Clement... "It's called
'gray wine.'"
"What's gray about it? It looks red."
"Well, I don't know... they just call it gray wine...
would you like to try some?"
How could we refuse?
The first drinks made us think of a word: rotgut. We could
barely gulp it down; it was like medicine.
"Hmm... a very interesting taste," we said diplomatically.
"Not like any wine we've ever tasted."
"Glad you like it," came the reply. "Here have another
drink."
By the time this session was over, the wine didn't take so
bad. We were afraid we were acquiring a taste for it...
which would prejudice us against every bottle of decent
wine we drink from now 'til our drinking days are over.
"Not bad... " We finally rendered judgment... after several
glasses.
"Great... I made 635 bottles this year. I'll bring you a
few dozen."
"Thanks, that's great... "
Hardly had our head cleared than another friend appeared in
his hunting outfit. Good old Francois. He used to work on
the farm, taking care of the cattle. Since he has been
retired he still comes over to hunt. But he needs a written
authorization from the owner... which we gladly supply. In
return, he gives us wild game... and...
"Here," he began, carrying what looked like a 10-gallon
jerry can. "We had good grape harvest this year. So I made
you some pineau. If you'll get out some glasses... we'll
try it."
Dear reader, we don't what lies ahead for the world
economy. But whatever it is, it is a great relief to know
that we will not have to bear it sober.
--- Advertisement ---
Bad news: This year -- and for many, many more to come --
your ballot may as well be a piece of toilet paper!
It doesn't matter who eventually buys this election... the
country is destined to go bust no matter who sits in the
Oval Office. America stands on the verge of a deep
political chasm and the coming train wreck could obliterate
stock portfolios, crush home values, and decimate savings
funds... but there's a solution: And it can allow you to
protect yourself, your family, your house, and your wealth
from the impending economic disaster while giving you 7
ways to profit...
Get all the details now...
http://www.agora-inc.com/reports/DRI/electA04
---------------------
The Daily Reckoning PRESENTS: No such thing as a free
lunch? Try telling that to Easy Al, the mortgage-lenders
pal. Of course, today is Monday and the "angriest man in
economics" is up in arms...
WHO'S PAYING FOR THE FREE LUNCH?
by The Mogambo Guru
Richard Duncan, who wrote the book, The Dollar Crisis:
Cause, Consequences and Cures has a new essay:
Understanding Interest Rates in the Age of Paper Money. In
it, he addresses the paradox of the gargantuan borrowing of
every financial entity in the United States that should
have caused interest rates to increase, since there was
such a huge demand for people's money. Here's where the
paradox lies: The competition for that money would have
caused interest rates to rise because the old supply/demand
rule says that increased demand should cause prices (in
this case, the price of money) to go up. But interest rates
did NOT go up. Why?
The answer - you guessed it - because the United States
Federal Reserve created so damn much money! So, while there
is a big demand for money, and everybody in the United
States is issuing debt, the damn Fed and the foreign
central banks are creating so damn much money that there is
more than enough new money for everybody to get as much as
they want! And it's so cheap that insanely low rates are
more than enough to turn a profit for the lender, who
borrowed the money to make the loan, and is thus merely
living off the spread! Therefore, interest rates fall!
Specifically, Mr. Duncan says, "Today, the interest rate on
the U.S. 10-year Treasury bond is determined primarily by
the relationship between the demand for money from the U.S.
federal government and government-sponsored enterprises
(like Fannie Mae) and the amount of paper money created by
the United States' trading partners. This, in turn, is
generally (but not always) determined by the size of their
trade surplus with the United States.
"That's why interest rates fell. More paper money is
currently being created as a result of the rapidly
expanding U.S. current account deficit than is needed to
fund the budget deficit and the GSE's demand for credit.
This surfeit of money also explains why the interest rate
spread on corporate bonds over treasuries is at multi-year
lows."
This is not a free lunch, however many jerk politicians or
jerk Federal Reserve people, or jerk American economists
flap their lips about it. The price of this monumental
mistake, namely printing all this money and credit, will be
paid for, as it always is, in inflation. And inflation is
the one thing that nobody wants. And the inflation will be
measured in Mogambo Misery Units (MMU), which is simply a
moving-average of the number of times per day that I look
at something and say to myself, "I sure would like to buy
that spiffy anti-aircraft cannon to shore up the perimeter
defense in the backyard, but the price is now too high!"
And if you want to see the effects that inflation has on
people, as measured in MMU's, ask one of the 50 million
Social Security recipients, now equal to a third of the
work force and a quarter of adults in the whole country,
how their recent piddly 2.7% increase in their monthly
benefit is less than how much prices have gone up. Ask
them! Ask them how happy they are to have a falling
standard of living. As a research project for which I will
give extra credit, and so when it comes time to fill out
your report card, maybe some of you will have a chance in
hell of ever getting out of my class, especially you
Democrats who do not believe anything that history says, or
anything that textbooks say, or anything the Mogambo says,
and most of you could really use this extra credit, so
listen up. Ask them to give you a list of things that they
had to give up, or are giving up, because they can't afford
them anymore. Then compare that to how they like the
prospect of having a similarly falling standard of living
for the rest of their freaking lives! And their children,
too! And their grandchildren! Go ahead! Ask them!
And even that piddly raise in their Social Security checks
is chicken feed, and the recipients of those checks have
been experiencing a falling standard of living for quite a
while now, as explained by Walter Williams, who writes,
"Changes made in CPI methodology during the Clinton
administration have understated inflation significantly,
and, through a cumulative effect, have reduced current
Social Security payments by 30%, from where they would have
been otherwise. That means Social Security checks would be
43% higher."
So the latest fall in the standard of living for seniors is
just a little icing on their cakes, as they are already
down by 43%! Hahaha! Stupid old people! They are the ones
who always vote en masse, and look who they voted for! The
same elected bozos, time after time! And look what these
elected officials did to the seniors who elected them!
Hahaha! How's that old saying go? "Getting your just
desserts."
"In like manner, anyone involved in commerce, and relies on
receiving payments adjusted for the CPI, has been similarly
damaged." Well, that is certainly true of the Mogambo, who
is usually involved in that part of commerce that says,
"Sorry, dude, we didn't make any money this month, so we
can't pay you, and even if we did make any money we
wouldn't pay you because we don't like you." And the reason
they didn't make any money is that their costs are all
suddenly rising.
But all is not lost! For every winner there has to be a
loser, so that the cosmic yin-yang works out, and Williams
says, "On the other side, if your are making payments based
on the CPI (i.e., the federal government), you are making
out like a bandit." See? Don't you just love how this whole
balancing of karma keeps things in neutral? Now you see the
cold, hard logic of it all. And Alan Greenspan and Congress
are in the heart of it.
Regards,
The Mogambo Guru
for The Daily Reckoning
Editor's Note: Richard Daughty is general partner and COO
for Smith Consultant Group, serving the financial and
medical communities, and the editor of The Mogambo Guru
economic newsletter, an avocational exercise the better to
heap disrespect on those who desperately deserve it.
The Mogambo Guru is quoted frequently in Barron's, The
Daily Reckoning and other fine publications. If you're
inclined to read more, you'll find the whole Mogambo here:
Wailing Sirens and Wet Pants
http://www.dailyreckoning.com/body_headline.cfm?id=4224
--- Advertisement ---
My System Can Make You 3.5 Times More Money in Just 7
Days.
Join us and you could make $11,000 in as little as two
hours
just by trading Wall Street's biggest winners and losers!
In fact, I guarantee you'll make money using my Momentum,
Strength and Trend indicators, or I'll give your money
back!
http://www.agora-inc.com/reports/MST/WMSTE706
------------------------------------------------------
MAKE YOUR OPINIONS COUNT! Visit our Discussion Board at
http://www.agora-inc.com/forums/index.cfm?cfapp=3
and submit your views or read what others are saying.
Our writers and contributors also welcome your questions
and comments. Simply reply with the word 'Question' or
'Comment' in the Subject of your e-mail.
------------------------------------------------------
If you'd like, please e-mail this issue of the Daily
Reckoning to a friend:
http://www.dailyreckoning.com/emailfriend.cfm?id=10676
------------------------------------------------------
ADDRESS CHANGE? WISH TO CANCEL? You can administer your
account online. Simply go to Subscriber Services at:
http://www.dailyreckoning.com/subsvcs.cfm
------------------------------------------------------
*******
Please note: We sent this e-mail to:
<[EMAIL PROTECTED]>
because you or someone using your e-mail address subscribed to this service.
*******
To manage your e-mail subscription, use our web interface at:
http://www.agoramail.net/Home.cfm?List=RealityC
To cancel or for any other subscription issues, write us at:
Order Processing Center
Attn: Customer Service
P.O. Box 925
Frederick, MD 21705 USA
*******
Nothing in this e-mail should be considered personalized investment advice.
Although our employees may answer your general customer service questions,
they are not licensed under securities laws to address your particular
investment situation. No communication by our employees to you should be
deemed as personalized investment advice.
We expressly forbid our writers from having a financial interest in any
security recommended to our readers. All of our employees and agents must
wait 24 hours after on-line publication or 72 hours after the mailing of
printed-only publication prior to following an initial recommendation.
Any investments recommended in this letter should be made only after
consulting with your investment advisor and only after reviewing the
prospectus or financial statements of the company.
